Perdoceo Education Corporation
Q2 2013 Earnings Call Transcript

Published: 8 Aug 2013

[Operator:]

Welcome to the Career Education Corporation Second Quarter 2013 Earnings Conference Call. My name is Adrienne, and I'll be operator for today's call. [Operator Instructions] Please note this conference is being recorded. I'll now turn the call over to Doug Craney. Doug Craney, you may begin.

[Doug Craney:]

Thank you, Adrienne. Good morning, everyone, and thank you for joining us on our second quarter 2013 earnings call. With me on the call this morning are Scott Steffey, our President and Chief Executive Officer; and Colleen O'Sullivan, our Senior Vice President and Chief Financial Officer. Following remarks made by management, the call will be open for analysts and investor questions. This conference call is being webcast live within the Investor Relations section of our website at careered.com. A replay of this call will be available on our site. You can also contact our Investor Relations Department at [phone]. Before I turn the call over to Scott, let me remind you that yesterday's press release and remarks made today by our executives may include forward-looking statements as defined in Section 21E of the Securities Exchange Act. These statements are based on information currently available to us and involve risks and uncertainties that could cause our actual future results, performance and business prospects and opportunities to differ materially from those expressed in or implied by these statements. These risks and uncertainties include but are not limited to those factors identified in our Annual Report on Form 10-K for the year ended December 31, 2012, and our other filings with the Securities and Exchange Commission. Except as expressly required by the securities laws, we undertake no obligation to update those risk factors or to publicly announce the results of any of these forward-looking statements to reflect future events, developments or changed circumstances or for any other reason. In addition, the remarks today may refer to non-GAAP financial measures, which are intended to supplement, but not substitute, for the most directly comparable GAAP measures. Our press release, which contains financial and other quantitative information to be discussed today, is available within the Investor Relations section of our website at careered.com. Now let me turn the call over to Scott Steffey.

[Scott W. Steffey:]

Thanks, Doug. Welcome to the team. Good morning, everyone, on the phone, and thanks for joining us. Today, I'd like to share with you some thoughts on topics that are core to our education business. Following my comments, Colleen O'Sullivan, Senior Vice President and Chief Financial Officer, will provide additional detail and color on our second quarter results. We will then be happy to take your questions. Since assuming my leadership role, I've been busy getting to know Career Education inside and out from the boardroom to our campuses. I've visited 14 campuses across 5 states and Europe so far. I plan to continue visiting campuses regularly over the coming months. I've met with the leadership of most all of our campuses in the United States and Europe, as well as several layers of leadership at the University divisions, which is something that I enjoy doing as I find that campus presidents, division leaders and their teams often have some of the most valuable insights. I've visited several back offices, technology and enrollment-based that serve various aspects of the company. I've visited admission offices, speaking with them about the challenges they face today as competition for prospective students is greater than ever. I've connected with our employees through regular e-mail messages, town hall webcast with all employees, another which is scheduled for later this month, as well as one-on-one meetings regularly with my senior direct reports, in addition to 2 and 3 layers down within the organization. I've also spent time in Washington, D.C. speaking with members of Congress, accreditors, regulators and industry leaders and have spoken with a number of existing and potential investors. I've also been working strictly to assess my core team, and I've already made some changes, which I believe will better position us for the future. On some of those changes, Diane Auer Jones has assumed the role of Senior Vice President and Chief External Affairs Officer. Diane has been heavily involved in our Washington, D.C. outreach efforts during her entire Career Education tenure. As you may know, her experience includes serving as Assistant Secretary for Postsecondary Education in the U.S. Department of Education during the administration of President George W. Bush and in various committee staff positions in Congress. I'm confident she will continue to serve as well, as we advocate for our students and our schools. After determining we had a skilled professional already here in an interim role, I named Jennifer Camp our Chief Human Resource Officer. Jen has been with Career Education for 5 years and has proven to be an outstanding partner to leaders across the organization. I am also pleased that in June, we were able to add Lysa Hlavinka Clemens to our leadership team as Senior Vice President of Strategic Initiatives. Lysa's 20-year career in private sector education began with the University of Phoenix and includes several years when she and I worked together at Strayer Education. She was actually my first senior hire there. So I know the level of experience, professionalism and integrity she brings to us at Career Education. Lysa has assumed leadership of our ongoing reengineering initiatives, which I'll discuss more later. She's also overseeing our Transitional Schools group, which is now led by Vice President Julia Leeman, since I appointed her to that permanent position in May. Julia has been with Career Education for more than 9 years and has great deal of experience in successive leadership roles with our health school. I'm looking to strengthen and enhance our operational focus of our ethics and compliance regulatory operations, legal and audit functions. These are areas -- these areas of opportunities work in a more integrated manner, and I'm in the midst of a comprehensive review of these functions to determine how best to align them for optimal performance, efficiency and student service. Needless to say, it's been a very busy couple of months, but the time has been extremely helpful in my transition into this leadership role. I've mentioned them before, but I'd like to reiterate the goals I've outlined for Career Education and its family of institution which include

[Colleen M. O'Sullivan:]

Thanks, Scott. Good morning, everyone. Let me first start by reminding you of a few items included in the press release and Form 10-Q issued last night. The second quarter results have several items impacting comparability to the prior year. First, a $10 million or $0.10 per share charge related to the New York Attorney General investigation; $4 million or $0.04 per share of impairment charges related to our Le Cordon Bleu and Sanford-Brown trade name; and $2.5 million or $0.02 per share in severance and related expenses associated with our rightsizing and reengineering initiatives. The second quarter of last year's results included goodwill and asset impairment charges totaling $85.4 million or $1.24 per share, recorded primarily within our Health Education and Design and Technology segments. In addition, during the quarter, we completed the teach-out of Sanford-Brown Landover, which had been reported within our Transitional segment. The results of operations for Sanford-Brown Landover are now reported in discontinued operations. Now let me provide an overview of financial performance for the quarter. Revenue was $295 million, a decrease of 19% versus the prior year. Operating loss was $64 million, driven by declining student populations across our domestic institutions, as well as the items I mentioned above. Overall, new student starts, excluding Transitional Schools, were down 19% from last year, while student population declined 20% versus the second quarter of 2012. Turning to financial results by operating segment. First, the Career Schools Education Group. In the second quarter, revenue of $108 million decreased 22%, reflecting a 3% decline in new student starts and 30% lower student population levels versus the prior year. Together, these institutions reported an operating loss of $52 million during the second quarter. Despite these financial headwinds, progress has been made to enhance critical operational and academic processes across the education group. During the second quarter, we experienced an increase in applications over the prior year. We anticipate further improvements as the impact of intake initiatives, new programs and reengineering efforts begin to take hold. Now moving to the University group, which include our predominantly online institutions, American InterContinental University and Colorado Technical University. In the second quarter, new student starts declined 31% and 24% in AIU and CTU, respectively. As discussed in previous earnings calls, this metric is being impacted by our Readiness Opportunity program. Excluding the impact of this program, new student starts were down 8% and 15%, respectively. As Scott discussed, we are expecting to see the positive impact of a number of initiatives in the second half of 2013. For the second quarter, AIU revenue of $60 million was down 24% versus the second quarter of 2012. Student population during the quarter decreased 20%, compared to the second quarter of last year. Revenue for CTU of $87 million was down 5% versus the second quarter of 2012, as a 9% reduction in student population offset modest increases in revenue per student. Operating margins in AIU and CTU were 1.7% and 19.1%, respectively. Next, our International Education Group continues to perform well. In the second quarter, revenue increased 22% to $26 million. Let me remind you the year-over-year comparison is impacted by our fiscal 2012 acquisitions of Luxury Attitude and the French business school, ESC Chambéry. Excluding this impact, international revenues would have been up 7%, as a result of higher average student population and moderate increases in revenue per student. As a reminder, the majority of the programs offered by our international institutions follow a traditional school calendar. As such, ending population as of June 30 is low as students complete the courses of study. Our expectation is that new student starts for the remainder of the year will continue to grow due to its strong program offerings, coupled with the synergies afforded by the prior year acquisition. Operating loss for the quarter was $4 million, declining from the prior year due to its sustained investments in programmatic accreditation. Moving to our Transitional Schools segment. As Scott mentioned, these institutions continue to operate as expected and in line with our teach-out schedule. Our expectation remains that this segment will incur operating losses between $70 million and $80 million for the year, excluding the impact of remaining lease obligation charges and other unusual items. As Scott also discussed, we remain on-track to reduce operating cost by $25 million or more in 2013, as a result of the implementation of initiatives identified to rightsize and reengineer our processes, which include reductions in both headcount-related and non-headcount-related costs. As a result of decisions made in the second quarter, we recorded $2.5 million in severance and related costs. We anticipate additional severance and related expenses of up to $2 million to be recorded in the balance of 2013 as we finalize our decision surrounding additional initiatives. As we exit 2013, we are anticipating that approximately 480 positions, both filled and unfilled, has been eliminated from the organization related to this program. Before we open the call for questions, let me update you on our financial position and liquidity. As of June 30, 2013, the company had cash, cash equivalents and short-term investments of $242 million. Cash flow from operations for the 6 months ended June 30, 2013 was a $67 million net usage of cash, with capital expenditures of $10 million or 1.6% of revenue. As we execute on our strategic imperatives, we expect that there will be continued pressure on our domestic operating cash flow in the short-term. However, as Scott mentioned, we do anticipate that we'll be able to satisfy the cash requirements associated with, among other things, our working capital needs, capital expenditures and lease commitments through at least the next 12 months, primarily with cash generated by operations and existing cash balances. We continue to monitor the operating performance of the business closely and are in the process of implementing initiatives to further improve the financial position of the company, which include our continued focus on reducing our cost structure, improving processes for attracting, educating and placing our students, as well as commencing the process to extend or replace our existing credit facility, assisting the value or sale of certain assets, reviewing our real estate footprint and evaluating our portfolio of campuses. And so with that, operator, let's open up the call for questions.

[Operator:]

[Operator Instructions] And we have Jerry Herman from Stifel, in line with a question.

[Jerry R. Herman:]

I appreciate your comments about your analysis on some of the strategic issues. Scott, is there a venue or a way you're going to sort of unveil that plan with regard to what you might do with sales portfolio, real estate, capital structure, processes, et cetera?

[Scott W. Steffey:]

Jerry, what I plan on doing right now -- as I've mentioned in my comments, we're entering a period where strategic planning period traditionally of the company. We have a board meeting coming up in September where we're going to be going through a number of issues and finalizing some of our thoughts. And it will be post that time period where we still may have some things that we need to nail down and sell up as exactly we start to dot some i's and cross some t's. So it will be post that period that we'll look at how we go about communicating properly with everyone.

[Jerry R. Herman:]

Great. And with regard to, Scott, your interaction with the various regulatory and legal bodies that impact your business. Can you maybe give us an update in terms of sort of what your strategy has been there? Who you've met with? What sort of feedback that you've gotten from those folks and how well they understand or don't understand what you're trying to do at the company?

[Scott W. Steffey:]

Sure. I'm not going to go into exactly who I've met with, but what I'll say is that the conversations have gone pretty much as I would have expected. And they've generally been in the context of sort of 2 camps. One camp of people that I don't have a long-standing relationship with, who I've met with and talked about the company's history and issues with regards to company's history. And then I also had the opportunity to talk about my history. And how I have done things both at the State University of New York and at Strayer and what my track record has been on those fronts and talked about then the future, and whether from the parties that I'm meeting or from my self-talking about how it appears to be a good match for bridging the future to where the company is today. The other camp is people that I've had long-standing relationships with, and those have been a lot of fun to reinvigorate and a lot of excitement and optimism for the future.

[Jerry R. Herman:]

Okay, great. And then with regard to the operations of the business, I realize there's a lot of moving parts here. But can you maybe provide some color in terms of when you might expect volumes and volumes starts to improve? I mean, I'm just looking at the numbers, they're sequentially getting worse. But I realize, again, there's a lot going on or said differently, is there level of volume that you think about as being sort of breakeven?

[Scott W. Steffey:]

I think the best way to answer that question. I've tried to say in my comments that we're making a lot of adjustments from a standpoint of our initial touching with students, how we're persisting with them and continuing and assisting them with their full education through the program. And we're seeing some signs that are positive. We still got some very big issues to manage through, expressed written consent is a meaningful issue. We don't know exactly how that's going to impact the business. We've done a whole lot from a standpoint of scenario planning and contingency planning around that issue. And we feel pretty comfortable we're in good shape to address what the foreseeable potential circumstances are of that. So I'm not going to give a future look on it, but I -- from where I'm sitting, we're seeing some good progress taking place.

[Operator:]

And we have Jeff Silber from BMO Capital Markets.

[Jeffrey M. Silber:]

Again, as Jerry said, there are a lot of moving parts here. But is there any way you can help us model a little bit better in the near-term, giving a little bit more color by segment. You've mentioned you we expect starts to be up in the International segment. Any trend data on the other segments would be helpful as well.

[Scott W. Steffey:]

I appreciate that, Jeff, but right now, we're just not prepared to lay out a new model for the company or make any forward-looking statements. What we have said is that applications are up in our different segments. And that's a positive sign.

[Jeffrey M. Silber:]

All right, fair enough. Again, just a couple of tidbits here. The readiness program in AIU and CTU, when are you going to anniversary the impact of that?

[Scott W. Steffey:]

When are we going to anniversary the impact of that?

[Jeffrey M. Silber:]

Yes, I guess, when did it began, if you could remind us on that.

[Scott W. Steffey:]

I think it's September, October.

[Jeffrey M. Silber:]

Great. And then, again, just some modeling questions. Capital spending for the rest of the year, what are your plans?

[Colleen M. O'Sullivan:]

Jeff, we're expecting somewhere between 2% and 3% of revenue from a CapEx perspective for the full year.

[Jeffrey M. Silber:]

Okay. And I know tax rate might be difficult, but if you can give us a guesstimate or a range where it might come out?

[Colleen M. O'Sullivan:]

We continue as our 10-Q showed to benefit our losses and with some discrete items, specifically in the second quarter that I've referred to in the 10-Q footnotes. It's difficult to call it, but we do anticipate it to be probably in the 40% to 50% benefit effective tax rate for the year.

[Jeffrey M. Silber:]

Okay. All right, great. And are there any discrete items that we should be aware about that are coming in the back half of the year?

[Colleen M. O'Sullivan:]

As we've said previously, as my remarks today said, we have expectations for some additional severance here in the back half of '13 of up to $2 million. I think, as we've said previously, as our Transitional Schools wind down, there will be some potential remaining lease obligation charges, but for 2013, nothing significant expected from that perspective for the balance of the year.

[Operator:]

And we have Trace Urdan from Wells Fargo, in line with a question.

[Trace A. Urdan:]

I hope this isn't a repetitive question, but, Scott, I thought I heard you talking about applications being up. And I think I also heard you say in your prepared remarks, the conversion rates were improving. And I'm wondering if you just put that in the context of the starts declines. Is this an issue of timing? Is it different? Or are you seeing particular weakness in show rates? Can you just reconcile those statements for us?

[Scott W. Steffey:]

Sure. We have seen applications improve. It is -- and we have seen conversion rates start to improve as well. A good portion of why it hasn't shown up so far is a timing issue. There has been a slight show rate issue in one of the elements of Career Schools side that we think we have our hands on. But so we think we've got that moving in the correct direction. But overwhelming preponderance is a timing issue.

[Robert C. Wetenhall:]

Okay, can you elaborate on that show rate issue that you just mentioned?

[Scott W. Steffey:]

Not really. I mean, it has to do with just some experimenting that's going on with some initial intake issues. And then I think we need to get that a little bit better as to how we're doing some of our orientation and first touchwork in that area. So I don't see it as -- it's mostly I think an execution operational issue.

[Robert C. Wetenhall:]

Okay. And then you come in and inherited a pretty large volume of various and sundry consumer lawsuits. And I'm wondering how you're -- these are all this suits that sort of predate 2010, but they're kind of hanging out there. I'm wondering how whether you take in a fresh look at them strategically whether there's anything that resulting from your arrival at the company that you're doing differently from a standpoint of defending yourselves against these legal challenges?

[Scott W. Steffey:]

We're continuing to be very diligent in managing these efforts. I'm happy to talk about what I considered to be the 3 big buckets that were overhanging the company quite a bit. And we've done a great job, I think, there in terms of moving along. I don't have anything new to report on any of the other matters in front of us.

[Operator:]

And we have Corey Greendale from First Analysis, in line with a question.

[Corey Greendale:]

Scott, I'm wondering how you're thinking about tuition price levels and particularly, I know you said you're piloting some stuff at AIU. I was wondering if you could elaborate on that a little bit, and also comment on the Health Education segment in light of the 9010 considerations there?

[Scott W. Steffey:]

Yes. I'm not ready to make any announcements with regards to any differences in tuition pricing other than we are looking at a variety of different options. And I think we have a few things in a hopper that are different than what have been tried by some others in the industry. We're looking at some programmatic things that I think are very interesting that impact potential pricing offerings that we have and -- but I'm not ready to say anything more on that. Did you have a second half for that question?

[Corey Greendale:]

The second half was about the Health Education segment given that the...

[Scott W. Steffey:]

With regards to the Health -- the upstart enrollment on the Health side, that's really be taken in the context of just increased demand that we're seeing in our various markets over there. That's just good basic increased demand that is taking place out in the various geographies that we're in. From a 9010 standpoint, I've been looking at that very, very closely. We're in a good position right now. So that's not something that gives me any concern.

[Colleen M. O'Sullivan:]

Corey, I would just add, if you recall previously, we did make some adjustments back in 2012 in the Health side from a pricing perspective that is falling through now in 2013.

[Corey Greendale:]

Yes, but provided those adjustments were up, is that correct?

[Colleen M. O'Sullivan:]

Correct.

[Corey Greendale:]

Okay. And it sounds like that hasn't, from Scott's comment it sounds like demand is at least improving a little bit, despite the fact the price was raised last year?

[Scott W. Steffey:]

Right.

[Colleen M. O'Sullivan:]

Right.

[Corey Greendale:]

Okay, then the next question. The $25 million in cost savings this year, how much of that did you achieve in Q2?

[Scott W. Steffey:]

What I said in my first call was that the preponderance of that was going to be realized in the back half of the year. That's still true. We've made some great progress on it though and I'm not concerned about being able to reach the target that I've set out to everybody.

[Corey Greendale:]

Okay. And Scott, I know all right I believe that when you came into the company high-priority was making sure that you had kind of all the generals and lieutenants within the company lined up that you have the right people to go into battle with. Where are you in that process? Is that still high in your priority list? Do you think you mostly have all the right people and the right space at this point?

[Scott W. Steffey:]

Well, the players on the field is always the high priority for me. That comes with the job. So what I'll say there is we're trying to become an organization of continuous improvement. If we need to augment the skill sets that we have here, I feel very comfortable that we're able to do that. Lysa is a very good example of that. Having said that, I've got a very solid team that I'm very happy with and very proud of, but -- and so we're firing on all cylinders, but could I add additional strength to the team in the future, of course.

[Operator:]

And the final question comes from Peter Appert from Piper Jaffray.

[Peter P. Appert:]

So Colleen, not as an investment want more but we always want more and the $25 million permanent cost reduction, just in the context of the revenue pressures that you guys are facing, it just seems like a really small number. Can you speak to that issue?

[Colleen M. O'Sullivan:]

Just to keep in mind, as we said previously, we took other additional actions in the fourth quarter of 2012, both as a result of our announcement to close a number of campuses. But, in addition, some other actions to reduce cost. So the $25 million we're referring to in these activities is the new initiative that we embarked on in January of this year. And so those are very focused on permanent reductions in our cost structure. Obviously, as to your point, the revenue continues -- if it continues to fall, we always make adjustment from a variable cost perspective to mitigate that decline as best as possible. And I would also add, as Scott mentioned in the prepared remarks he said, that many of the actions are taking place here in the back half. So that's what the number we're referring to would be impact to 2013. So as you look out on an annualized basis, it would be a larger number.

[Peter P. Appert:]

Got it okay. And then Scott, I want to be sure I understand the messaging in terms of the trend in starts. Is your expectation that starts for the company are going to be positive by the end of this year?

[Scott W. Steffey:]

What I'm indicating is that we're seeing a noteworthy increase that appears to be directly related to improvements that we're making on our initial student impact with students, with potential students, with our -- with various aspects of the company and how we're conducting our orientations, and how we're moving in through things like 21 Day. And that, that is promising but that is a promising development. I'm also trying to put that in the context of things that we've got going on in the industry like, I've mentioned expressed written consent. So I'm not forecasting anything. I'm just letting people know, given some transparency on what I'm seeing in the business that is directly related to improvements that we're making on the business.

[Operator:]

All further questions can be directed to the Investor Relations line.

[Scott W. Steffey:]

Well, I guess, that concludes the need for any more Q&A. Thanks so much for joining us, and I look forward to talking to you next quarter.

[Operator:]

Thank you, ladies and gentlemen. This concludes today's conference. Thanks for participating, and you may now disconnect.